Goodegg Investor Letter – Q2 2024

Why is it that a watched pot never boils, that time flies when you’re having fun, and that a trip back from somewhere always seems shorter than the trip there? 🤔

Think about the last time you did a 60-second high plank (or held a difficult yoga pose, held your breath under water, or even tried to quiet your mind chatter). 

Sixty seconds – pssh, you probably thought. How hard could it be? Just a single minute out of the 1,440 minutes in a day. Surely you could hold a high plank for a full minute, no problem.

But soon enough, while holding that push-up position, your arms started quivering, your neck got tense, and with every passing second, you thought, “Geez, how can a single minute be so long??” 😮‍💨

Finally, the countdown started – 5, 4, 3, 2, 1…done! You collapsed to the floor, in simultaneous disbelief that you made it the full minute and sure that there must have been something wrong with the clock. ⏱️🧐

So here’s the question at hand. Why does 60 seconds of a high plank (or other strenuous task) seem so long, while 60 seconds scrolling social media or eating your favorite dessert or reading a good book seem to pass in a flash?

The answer lies in our perception of time, and in particular, our imperfect and biased perception of duration.

Our brains are funny about time. 🧠 We can look back at how long something felt after it’s done (like remembering a great book taking no time at all), or guess how long something will take in advance (like that security line that seems to stretch forever).

Here’s the trick: if we’re not worried about the time, it flies! But when time actually matters, like when you’re rushing for a flight, it feels soooo slow. That’s because our brains switch gears and start keeping a close eye on the clock. The more we focus on how much time has passed, the longer it seems to drag on.💡

This is exactly what’s happening in the greater commercial real estate market, particularly as all eyes are on the Fed (Federal Reserve) to see if there might be any indication of a drop in interest rates. 🔬

Because we’ve all been watching this figure closely over the last several quarters, it seems to be taking foreverrrr for the Fed to make the projected rate cuts. 🙏🙏🙏

But here’s the thing. When you put it in context of the history of interest rates, it actually hasn’t been that long. Rates have reached a historic low over the last 15 years or so, which makes this climb seem impossibly large and long.

But when you look back over the last 25 years or so, you can see that this is a cyclical process. Rates go up, stay up for a while, then inevitably come down. And this is the exact precipice we’re on right now. ⛰️

We’re all perched up here together, waiting and watching the Fed’s every move, which is why the time seems to be so drawn out. ⏳

But as they say – good things (and good deals) come to those who wait. And as we continue to wait and watch together, we know that when those rates start to come down, that’s when the real opportunities will come to pass, and that’s exactly what we’re preparing ourselves for.

That being said, while we maintain a strong focus on new acquisitions, we are also keeping a close and careful eye on prudent asset management of the existing properties within the Goodegg Portfolio. You may have seen some hard-to-read headlines about losses and deals gone sideways over the last several months, and we wanted to be transparent and let you know that we are not immune to that.

While we have not lost any investor capital to date, we have reduced or paused distributions on multiple deals within our portfolio, to prioritize building reserves and maintaining the long-term health of the assets. On top of that, we continue to feel the ripple effects of the shifting interest rates, particularly as it relates to loans on existing assets.

Over the last eighteen months or so, we’ve been actively working behind the scenes to proactively strategize around the lending issues we knew we would run into with select properties within our portfolio. In Q1 2024, Goodegg successfully led the restructuring of the loan on one of the largest assets in our portfolio – Waterleigh at Leland – together with the strength and partnership of so many of the existing investors in the deal, thus preserving millions in investor capital despite a tough lending environment. 

Time definitely slowed to a crawl for us during those days and weeks, as we worked to pull together so many different pieces (all of which were constantly shifting) to get the loan restructure across the finish line.

But just as with any challenge that arises in our business or our lives, we always aim to turn a “we can’t” into a “how can we?” And that resourcefulness – that’s exactly what helped us to navigate the successful loan restructure on Waterleigh, and what will help us navigate future challenges to come.

While we are not out of the woods yet, given that other properties in the portfolio are or will be facing similar challenges, we are continually grateful for the strength of the Goodegg Community. It’s incredibly inspiring to watch as we all put our heads together and continue to support each other, even when unexpected challenges arise. 

Whatever is ahead, know that we’re in this together, and we’re right there with you every step of the way!

In this Quarterly Investor Letter, we’ll walk through what has come to pass during 2024 so far, what’s ahead in Q2 and beyond, what prudent investors are doing, the hidden gems we’re finding in this market, how we’re preparing for the opportunities ahead, and much more.

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Q1 2024 Multifamily Review

As most investors are aware, watching what the Federal Reserve’s next moves will be very important as they continue their fight against inflation. Recently, the economy has shown additional strength, which has made the market rethink their aggressive rate-slashing projections. 

In March, the United States experienced robust job growth, adding 303,000 jobs, which surpassed expectations of 200,000. Revised figures for January and February contributed to a net gain of 22,000 jobs.

The increase in employment in March was primarily seen in the healthcare, government, leisure & hospitality, and construction sectors. However, sectors such as financial activities and professional & business services saw comparatively smaller gains.

The unemployment rate declined by 10 basis points (bps) to 3.8%, while the labor force participation rate saw a slight uptick to 62.7%. Average hourly earnings also saw a year-over-year increase of 4.1%, aligning with market projections.

Despite the strong job growth, the Federal Reserve is expected to maintain a cautious approach toward interest rate cuts. Nonetheless, it is anticipated that the Fed may initiate rate cuts around mid-year, potentially stimulating commercial real estate investment activity. Additionally, continued economic expansion is likely to support leasing activity.

The multifamily sector remains buoyed by elevated mortgage expenses, incentivizing renting over homeownership. Ongoing job expansion further fosters household creation, facilitating the absorption of new housing inventory.

On the lending front, lender restrictions continued to remain tight in Q1, especially as rates have not yet started to come down. Given that, we continue to seek creative financing solutions whenever possible, both for new acquisitions, as well as with expiring rate caps and loan restructuring (as with Waterleigh at Leland, mentioned above).

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Q2 2024 Multifamily Outlook

Renting will likely continue to be the less expensive option than buying a home for some time, which bodes well for the multifamily market in general. As of the end of 2023, average mortgage payments were 38% higher than average apartment rents in the United States, prompting many households to opt for renting rather than purchasing a home.

While forecasts suggest that the premium for homeownership may decrease in the coming years due to projections related to home prices, interest rates, and rent growth, it is anticipated to remain sufficiently elevated to encourage current renters to continue renting for an extended period.

There is still a projected housing shortage of 3.8 million units in the United States, which contributes to the maintenance of home prices and the premium for purchasing. The majority of this deficit, approximately 90%, pertains to single-family homes and smaller multi-unit dwellings.

While recent trends in new construction and reduced household formations have somewhat alleviated the supply shortage, the most optimistic projections suggest that the shortfall will persist until at least 2029.

In addition to the strong forecasted multifamily demand due to high housing costs in the coming years, we believe that the recent increase in cap rates is nearing its conclusion. This is due to the Fed positioning itself to lower rates this year. 

What this means for you is that, as cap rates stop expanding and start to compress again, commercial real estate values will rise, which bodes well for any existing investments in your portfolio and will likely spur new investment opportunities.

As we look towards Q2 of 2024, economic conditions appear to be moderating, with expectations of achieving a soft landing. Slower but positive trends are anticipated in job creation, wage growth, and GDP expansion, alongside a downward trajectory in inflation.

In this scenario, the multifamily market may experience some sluggishness, grappling with what is likely to be the peak of deliveries for this cycle in 2024. There is lots of new construction that is being delivered this year that began during the COVID boom which may suppress rents in the near term until all of the supply is absorbed. Once the supply is absorbed the rent growth and occupancy should rise as there have not been many new construction starts in the past 1.5 years.

Slower-moving secondary or tertiary markets are generally expected to outperform. While interest rates are forecasted to remain elevated, stability in rates could encourage increased multifamily lending activity throughout the year. 

This stability is also expected to stabilize cap rates and property values, facilitating agreement between buyers and sellers and potentially boosting transaction volume.

Despite short-term supply challenges, the multifamily market is anticipated to receive long-term support from the persistent housing shortage, a pricey for-sale housing market, and the emergence of the next generation of renters entering their prime renting years.

What all this means is that we foresee strong opportunities within the multifamily space in the months and years to come.

Key Multifamily Takeaways for Q2 2024

  1. Continued Rental Preference: Renting remains more affordable than buying homes, sustaining demand for multifamily properties. With average mortgage payments significantly higher than apartment rents, many households opt for renting, supporting market stability.

  2. Housing Shortage Dynamics: The United States faces a significant housing shortage, especially in single-family homes and smaller multi-unit dwellings, persisting until at least 2029. This shortage contributes to elevated home prices and premiums for purchasing, benefiting multifamily investments.

  3. Stabilizing Market Conditions: Recent increases in cap rates are nearing their peak, with the Federal Reserve positioning for lower rates. As cap rates stop expanding and begin to compress, commercial real estate values are expected to rise, offering favorable conditions for investments and new opportunities.

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Q2 2024 Hotel Review and Outlook

According to HVS, the leading global hotel consulting firm, In 2023, the U.S. lodging industry closed with a 63.0% occupancy rate, a slight uptick from the 62.7% recorded in 2022. While the group segment continued to see robust year-over-year growth, business travel also showed improvement, albeit at a slower pace. Overall, the average daily rate (ADR) increased by 4.3% throughout the year, driven by strong performance in the initial quarter. ADR growth tapered off during the summer months due to decreased leisure demand stemming from a shift toward outbound tourism and widespread economic uncertainty. However, ADR rebounded in the fall, averaging 3.9% growth in the final four months of the year. Consequently, revenue per available room (RevPAR) for the year experienced a 4.9% increase compared to 2022 levels, surpassing 2019 levels by 13.6%.

As inflation slows down and concerns about a recession diminish, coupled with restrained growth in supply, the hotel sector anticipates a period of gradual and stable expansion. Demand is projected to continue rising, notably fueled by an accelerating recovery in the group segment, which stands out as the most promising element in the current landscape. Business travel is expected to concentrate more on midweek nights, affecting Monday and Thursday nights negatively. Overall, a modest increase in occupancy is forecasted over the coming years.

Average daily rate (ADR) levels are influenced by varying trends affecting both demand and occupancy, exacerbated by ongoing economic uncertainty. These factors are projected to lead to gradual ADR growth in the short run, eventually aligning with the anticipated long-term inflation rate of 3.0% by 2026.

Key Hotel Takeaways for Q2 2024

  1. Stable Growth Projection: Despite fluctuations in average daily rates (ADR) throughout 2023, the hotel sector anticipates gradual and stable expansion in the coming years. With concerns about a recession diminishing and restrained supply growth, demand is expected to rise, particularly driven by recovery in the group segment.
  2. ADR Growth Expectations: Economic uncertainty and varying demand trends are likely to lead to gradual ADR growth in the short term. However, as inflation slows down and long-term stability is achieved, ADR levels are forecasted to align with an anticipated long-term inflation rate of 3.0% by 2026.

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Investor Sentiment

The first quarter of 2024 was marked by an overall increase in investing activity throughout all of our open funds. We have seen an uptick in outreach by both new and existing investors. There is a palpable desire from our current investors to once again put capital to work into new and exciting deals.

Although the cautious outlook from 2023 still exists for many investors, we have been struck by the optimism and trust shown by our long-time investors in the early stages of 2024. After ending the year with a series of successful acquisitions (both hotels and multifamily), there is a true sense of excitement growing about what may be on the near-term horizon.

As we reached the end of Q1 2024, our team announced the upcoming acquisition of Crowne Club Apartments in Winston-Salem, NC (to be part of Goodegg Wealth Fund II).

We were overwhelmed by the quick pace of investment commitments that were immediately secured by both new and long-time investors. This also opened the opportunity to launch our Goodegg Growth Fund III through our crowdfunding site. It has been truly exciting to invite a growing number of non-accredited investors into the Goodegg investor family by making these offerings available on a more consistent basis.

As has always been the case with our investors, cash flow continues to be a key driver for making investment decisions. The ever-changing lender landscape has made finding solid cash-flowing properties a bit more difficult, but our acquisitions team continues to find incredible structures with a dedicated focus on consistent cash flow and long-term wealth generation for all investors.

Given the number of diverse options within our investment portfolios, each investor can pick their preferred level of risk tolerance and counter-balance that decision with an appropriate expectation on cash flow.

This ability to choose the most appropriate return metrics for each family has been very well received by our investors. We have received terrific feedback that stresses the importance of delivering choices that allow families to structure their own unique portfolios. This has been an ongoing evolution for our team over the past few years, and we are excited to consistently offer a wide array of investment opportunities.

During Q1 2024, there was an expectation that capital markets would begin to loosen on a national scale. Although there has been significant activity from the Fed, the positive changes that were expected have simply not yet come to pass. 

The positive momentum that was anticipated in all asset types has been somewhat stifled, but our team continues to look for hidden opportunities.

Our focus on maintaining defined return metrics has paid off as the market has begun to embrace and understand the “buy box” of Goodegg Investments. Our team has created a strong reputation for sticking to conservative underwriting and creating fair structures that work within the current capital markets landscape.

We have absolutely seen a hesitation from a number of investors over the past few months based on the uncertainty in the market, but the feedback that we’ve received has been extremely positive based on the return metrics that have been created by our conservative approach to the market.

It’s clear that investors are looking for us to make prudent choices that have bona fide upside potential as market velocity continues to accelerate. No matter the experiences during 2023, it is clear that there is a growing desire to invest, although maybe with a slower pace.

Although there was an overall expectation that 2024 would usher in a consistent flow of properties with expiring debt and a need to dispose of assets in advance of facing potential foreclosure activities, the market has been surprisingly quiet.

The heavily discounted properties that were predicted to hit the market have simply not appeared just yet.

In place of any such distressed selling activity, we have seen lenders opting to restructure debt terms and prolong the inevitable outcome to some point in the future. We still anticipate a fair amount of mark-to-market activities that will necessitate the offloading properties in the future. Our team remains prepared to act when this type of activity finally hits the market.

This past quarter, many of our long-time investors have hesitated to invest, as there was an anticipation for distressed buying in many of the key growth markets throughout the south and southeast.

As this has not become reality just yet, we have seen a recent increase in investments in our more traditional properties across all of our open funds. We will remain steadfast in our underwriting process and will be deliberate in our acquisitions of truly viable properties with strong and consistent returns regardless of the trajectory of the market.

Key Hotel Takeaways for Q2 2024

  • Increased Investor Activity: The first quarter of 2024 witnessed a surge in investing activity across all of our open funds. This indicates a growing optimism and trust among investors, driven by successful acquisitions and a sense of excitement about future opportunities.
  • Focus on Strong Returns: Despite market uncertainties, strong returns with both cash flow and great upside potential remain a primary consideration for investors when making investment decisions. By offering a range of investment options with varying risk profiles, investors can tailor their portfolios to align with their financial goals and risk tolerance.
  • Conservative Underwriting: Our team’s conservative approach to underwriting has paid off amidst market volatility, earning us a reputation for sticking to defined return metrics and creating fair structures that resonate with investors. While there has been some hesitation among investors due to market uncertainty, our commitment to prudent decision-making and disciplined acquisition strategies positions us well for continued success in 2024 and beyond.

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The Goodegg Portfolio

In our Q1 2024 Quarterly Letter, we talked about how clarity with respect to the debt market had continued. It became almost a foregone conclusion that inflation had been tamped down to a rate where the Fed would consider easing as the economy neared their 2% target rate.

Inflation has not reached 2% and has stubbornly remained in a range of 3.1% to 3.4% since October of 2023. As mentioned previously, total non-farm employment has continued to surprise just about everyone by adding 303,000 jobs in March mostly in healthcare, government, and construction.

The economy appears steady, and until inflation creeps nearer to its 2% goal or signs begin to point towards softening such as unemployment rising, it is unlikely we will see a decrease in the Fed rate in the 2nd quarter.

We continue to see positive signs in the multifamily market during the first quarter, as 104,000 units were absorbed – the highest number since the third quarter of 2021.

Meanwhile, the vacancy rate rose to 7.8%, as 140,000 new units were delivered, constituting the 10th consecutive quarterly increase but the smallest in that period. Equilibrium is coming between new construction and absorption, but most likely not until 2025.

Giving credence to this expected equilibrium, Blackstone, the world’s largest private equity firm, just purchased Apartment Income REIT for $10 Billion, marking the largest multifamily transaction in their history. A very bullish move from a very savvy investor.

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The Goodegg Portfolio in 2024

Like the broader market, we continue to battle new units coming online in most of our markets. New apartment communities are struggling mightily, as they are desperate to lease up their inventory while maintaining a high enough rent to cover their monthly debt service and expenses.

Our highlight of the quarter has to be The Encore at Millenia in Orlando. We are 97.21% occupied as of early April 2024, which is an increase of over 7% since acquisition in December 2023.

The property has a lot of renewals coming up, and this strong occupancy will allow us to hyper-focus on managing our way through them. 

As always, we will continue to ask our operating and property management partners to focus on the minutiae, dig deep into the numbers, and listen to what the market and its customers are saying.

We look forward to on-boarding Crowne Club Apartments in Winston-Salem in the near future and adding to our portfolio of geographically diverse and well-positioned assets.

Goodegg Portfolio Asset Overview

Below are some key insights on select assets within the Goodegg Portfolio.

Waterleigh at Leland

– 248 Units | Wilmington, North Carolina –
  • 93.95% occupied and 91.13% leased
  • Minimal concessions have been needed, as overall performance remains strong.
  • The market is absorbing newly constructed units at a reasonable pace and the new property next door is 71% leased and will take considerable pressure off the market once it reaches stability. 
  • As mentioned above, we successfully completed a significant loan restructuring for this asset in Q1 2024, which allows us to preserve investor capital and build a firmer foundation for this strong performing asset for the months and years to come.

Mission Antigua

– 248 Units | Tucson, Arizona –
  • 91.9% occupied and 94.8% leased
  • The market is currently very competitive with concessions. We have revamped our entrance and expect to see some regression in concessions in Q3 as the busy season begins.
  • Annie and Julie were recently on site at the property in March 2023, taking a closer look at the property and management, in order to further optimize this asset. Check out this brief 2-min video, shot while on site.

Royal Spring

– 351 Units | Houston, Texas –
  • 95.2% occupied and 94.6% leased
  • The market is steadily absorbing an aggressive amount of new construction.
  • Good progress made in Q1 with a significant increase in occupancy and a good increase in retention of existing tenants.
  • The current rate cap of 5.25% expires in September of this year. Our operating partner has already begun discussions with our lender about new rate cap and extension.

The Sarah at Lake Houston

– 350 Units | Houston, Texas –

  • 94.3% occupied and 93.10% leased
  • Leasing activity has remained steady amid absorption of new construction.
  • The current rate cap expires in July of this year. New rate cap discussions with the lender are already underway.

The Edge at 65th

– 56 Units | Phoenix, AZ –
  • 92.86% occupied and 94.64% leased
  • Continuing the renovation of all units at a consistent pace. 
  • The market is holding steady, and we are still getting incremental increases on renewals and have reduced concessions on new leases.

Encore at Metro Millenia

– 215 Units | Orlando, FL –
  • 97% occupied and 96.74% leased
  • Occupancy as of the end of Q1 has increased by 7% from the beginning of Q1. 
  • We have reduced our concessions as a result of our successful lease-up.

Check Out Our Track Record Of Success

Curious whether we can actually do what we say we're going to do? Compare projected versus actual returns in all the deals we've exited to date.

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As We Move Forward…

In the final weeks of Q1, several members of the Goodegg Team attended the Best Ever Conference, one of the best commercial real estate events of the year. We loved the opportunity to gain valuable industry insights and foster meaningful relationships and partnerships.

The wisdom shared by industry leaders reminds us to keep our eyes on the horizon, emphasizing the importance of a long-term perspective in navigating market cycles. While short-term disruptions may cast shadows on immediate gains, our strategies remain anchored in building wealth for the future.

As we enter Q2 2024, we do so with optimism and determination, fully aware of the storm that we’re navigating, but with the knowledge that beautiful seas lie ahead as they have on the other side of every storm we’ve weathered. 

We press onward, committed to supporting each of you through thick and thin. We’re deeply grateful for the opportunity to support you in strategically and intentionally growing your wealth. Together, we’ll chart a course toward financial success, leveraging our collective expertise and dedication to achieve your investment goals.

If you’d like to invest with us and haven’t already, be sure to join the register on the Goodegg Investor Portal so you can stay in the loop on all future investment opportunities.

And, remember that we have four investment opportunities for you to explore:

And of course, if you know anyone who wants to build their wealth, we would love it if you would forward this email to them

Remember – we are never too busy for your introductions and referrals.

Have a sunny-side-up day!

Julie, Annie, and The Goodegg Investments Team

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